Following this morning's eurozone inflation data, Capital Economics asks whether the currency bloc is turning into Japan, facing a 'lost decade' of falling prices and a weak economy.

Low inflation might sound like good news for Greece, Spain and Italy and Portugal, but is actually a sign of weakness and falling output in these economies, according to the consultancy, which tends to take a bearish, Eurosceptic line.

And Capital Economics warns that the risk of one of these countries falling out of the currency union has not gone away.

 The key point though is that euro-zone does not need to turn Japanese to cause serious problems for the indebted peripheral countries. Even low positive inflation will make it very hard for them to restore their competitiveness versus the core economies and to prevent their debt ratios from rising. Against that background, and notwithstanding the markets’ recent optimism, the risk that one or more of those countries might yet seek a different route back to economic and fiscal health – perhaps via default, perhaps even via exit from the currency union – has not yet fully evaporated.

A summary of key eurozone data can be found here and full reaction from economists here.

It is time for me to wrap up today's blog. Thank you for following and for all your comments.

There could be more than a crackle of tension at the next get-together of EU leaders. Radek Sikorski, Poland's foreign minister, and a prime candidate to become the EU's next foreign policy chief, has called on France to cancel a €1.2 bn contract to sell Mistral helicopter carriers to Russia. In an interview with Le Monde, Sikorski said the helicopters could be used to threaten other European nations.

Asked if France should deliver the two vessels, he said:

No, because Russian generals have already said what these ships will be used for: to threaten Russia's neighbours in the Black Sea and that means Europe's partners. I don't think France would want to be in the position of supplying efficient weapons to an aggressor.

According to Reuters, Barack Obama will also bring up the Mistral sale when he meets French president Francois Hollande for dinner and bilateral talks on Thursday. Poor Mr Hollande must then dash to a separate dinner meeting with Russia's Vladimir Putin. A bit off-topic, but AP have a good article on this tricky logistical challenge.

In February, BNP said it had set aside $1.1 bn to cover the potential U.S. penalty, but two months later, admitted that fines "could be far in excess" of that.

Here is a flavour of the Wall Street Journal report:

It isn't clear how European regulators might tweak their stress tests to estimate the potential costs of investigations.

The exams, being conducted on 124 banks by the ECB and the European Banking Authority, are already under way. Results are expected in October. Banks that flunk the test will need to come up with new capital to fortify themselves against future losses.

Modeling losses on bad loans in a deteriorating economic environment is relatively straightforward because regulators can apply uniform loss rates to different types of assets. But the size of a regulatory penalty is much harder to anticipate. That is partly because it hinges on subjective factors such as whether authorities detect a pattern in a bank's misconduct and perceive a bank as having been cooperative during the investigation.

ECB officials have told bank executives that they want to avoid a situation where the stress tests give a clean bill of health to a bank that, months later, sees its capital buffers severely eroded by a major financial penalty, according to the industry officials.

George Osborne at the CBI annual dinner in London last month. photograph: Neil Hall/Reuters

Some good news for chancellor George Osborne: the UK has one of the fastest-growing economies in the G7, according to the latest batch of statistics from the ONS.

The UK is the world's 8th biggest economy, but has the 4th highest GDP per capita - at $36,333 (£21,668) a head compared to the US with $51,708, according to an ONS report on GDP and the labour market.

But there have been ups and downs: between 2000 and 2007, the UK experienced the highest real wage growth of any G7 country (14%), but has since seen the biggest fall (5.1%).

The fact that the UK is growing faster than many developed countries is not new. Some might say it can be detected in this
smug
response from HM Treasury to a European Commission suggestion that the government might build more homes and take other steps to bring down property prices.

The Treasury said that as one of the fastest growing economies, the UK would listen to the commission with interest.

Turning away from the eurozone, in Turkey the prime minister has fallen out with the country's central bank. Recep Tayyip Erdogan, who faced large protests anti-government protests last year and more recently has been embroiled in a corruption scandal, continues to put pressure on the Turkish central bank.

These are routine presentations but I do not find his approach concerning interest rates at all positive and I do not accept it..I hope that new steps are taken immediately and this issue is resolved

Via Reuters

Erdogan, who has already served three terms as prime minister and could be a candidate for the presidency in August elections, is keen to maintain Turkey's economic growth. The bank cut interest rates for the first time in a year last month, despite high inflation, after calls for a rate cut from the prime minister.

Given the continued weakness in today’s data, the ECB are widely expected to cut interest rates to a level below zero this week, meaning banks will be charged to hold reserves there. It is hoped that interest rate cuts will boost demand by increasing credit and discouraging the holding of cash balances. Boosting inflation is particularly important for Eurozone members with high debt burdens, as this helps to reduce the real value of repayments.

In reality, however, Cebr believe this cut is probably too little too late, and will have a minimal impact the Eurozone’s economic outlook. Another potential policy change on Thursday, long-term refinancing operations aimed at expanding credit provision to small businesses, may be more successful in boosting economic activity and raising inflation.

Dominic Rossi, global chief investment officer at Fidelity Worldwide Investment, says the European Central Bank has sat on its hands for too long:

"The ECB has consistently underestimated the deflationary forces threatening Europe and now is the time for unconventional monetary policy".

ING said that fresh action from the ECB is a "stone cold certainty"....

· Given that one of its main aims is to weaken the euro, the ECB seems highly likely to cut its refinancing rate from 0.25% to 0.15% or 0.10% and to take its deposit rate modestly into negative territory (from 0.0% to -0.1% or -0.15%). While the ECB has previously seemingly baulked at taking its deposit rate into negative territory, it now appears to believe that a full lowering of the interest rate corridor would be most effective rather than just trimming the refinancing rate.

· The ECB will highly likely enact some liquidity measures in June. The ECB could very well do another Long-Term Refinancing Operation (LTRO) which may well be tailored specifically towards lifting bank lending to businesses, especially smaller ones. This could be along the lines of the Bank of England’s Funding for Lending Scheme. The ECB could also stop sterilizing the money it spent buying sovereign bonds during the Eurozone's debt crisis under its now-terminated Securities Markets Program (SMP). The ECB is also keen to revive the market for Asset Backed Securities (ABS) so it could also announce some measures in this area.

And Jane Foley of Rabobank warns that the ECB risks sending the euro soaring if it disappoints on Thursday:

Not only does the ECB have a desire the increase the policy support to SMEs within the region but the disinflationary environment has stoked a clear preference for a softer currency.

Since his warnings last month that policy action is likely in June, the EUR has dropped 1.7% vs. the US dollar. The test for Draghi this week will be to avoid disappointing the market which could result in a ‘buy on the rumour, sell on the fact’ reaction in the euro.

Weak inflation isn't the only problem facing the eurozone, of course -- it is also being hampered by a fractured banking sector where companies in the Southern periphery face much higher borrowing costs than their Northern rivals.

Photograph: BAML/fastFT

fastFT just published this chart, via Bank of America Merrill Lynch, showing how Spanish firms face much higher real interest rates than, say, those in Germany.

That higher cost of credit makes it harder for Spanish firms to compete, expand, take on more staff and help the eurozone economy recover.

That's why the ECB could launch a version of the UK's Funding For Lending scheme, to drive borrowing costs down.

Incidentally....financial writer George Cooper has blogged about how variable credit costs drive inequality, as the rich can borrow so much cheaper than the poor can.

As the profitability of any business venture is a function of the gap between the cost of capital and return on capital, it follows that any given venture will be more profitable, and less risky, to those who can borrow money at the lowest possible rates.

For this reason there are more potentially viable business ventures available to the rich than to the poor – as the saying goes: ‘the first million is always the hardest’.

This chart shows how May's eurozone inflation rate dipped back to the 0.5% level seen in March, while 'core inflation' (a better measure of underlying price pressures) is back at its record lows of 0.7%.

...but if the ECB was at all unsure of the need for strong action then the dip in Eurozone consumer price inflation to just 0.5% in May surely gave the Governing Council a final shove towards cutting interest rates and also announcing liquidity measures.

Today's unemployment figures also show there has been limited progress in fighting youth unemployment in the eurozone over the last year.

Eurostat reports that youth unemployment decreased by 415 000 in the European Union since April 2013, and by 202 000 in the euro area. That leaves 5.259 million young persons (under 25) unemployed in the EU28, of whom 3.381 million were in the euro area.

That means the youth unemployment rate was 22.5% in the EU28 (down from 23.5% in April 2013) and 23.5% in the euro area (down from 23.9% a year ago).

The lowest rates were observed in Germany (7.9%), Austria (9.5%) and the Netherlands (11.0%), and the highest in Greece (56.9% in February 2014), Spain (53.5%) and Croatia (49.0% in the first quarter of 2014).

Just 30 minutes until we get the overall eurozone inflation and jobless data (see preview here)

City firm Clear Treasury predicts that the eurozone inflation rate has fallen further away from the ECB's target of just below 2%:

Today, much anticipated flash inflation figure from Europe expect to see a drop to 0.6% in May from ).7% in April, a long way from ECB’s target inflation rate of 2%.

This would be the eighth consecutive month it has been below 1%. Unemployment data due today also from Europe is expected to remain unchanged from April’s figure of 11.8%, near record highs of 12% seen in 2013.

Nationwide: UK house prices rose 0.7% in May to new high

The average price of a home in the UK has hit a record high in cash terms.

Building society Nationwide has reported that price rose for the 13th consecutive month in May, meaning the average UK home now costs £186,512

As my colleague Hilary Osborne reports:

This is the first time that the index has returned to its peak since the crisis, and news that annual price inflation is now running at 11.1%, its highest level since June 2007, could fuel further calls for policymakers to step in to cool the market.

But at 0.7%, the monthly rate of inflation reported by Nationwide was lower than the 1.2% recorded in April.

Markets nervously await eurozone inflation and unemployment rates

Good morning, and welcome to our rolling coverage of the financial markets, the world economy, the eurozone and business.

It's examination season in Europe right now, with students cramming up and being quizzed about how well they grasp key subjects. And European policymakers and politicians get their own test results today, when the latest eurozone unemployment and inflation data is announced.

And I fear dunce's caps will be in demand more than gold stars at 10am BST when the figures are released.

Eurozone inflation is expected to have fallen back from last month's meagre rate of 0.7%, perhaps as low as 0.5%. That would surely heighten calls for the European Central Bank to ease monetary policy and announce new stimulus measures on Thursday.

Especially as Germany's inflation rate slipped to a four-year low yesterday -- this is now longer just a "peripheral" problem.

And Europe's jobless rate is expected to remain close to last month's 11.8%, and there are fears that Italy could be dragged up to a new record high.

If so, that will underline that the pace of recovery in the eurozone remains too slow to repair its battered labour market.

Stan Shamu of IG reports that the financial markets are nervously awaiting the data:

The recent moves in European equities have been choppy at best, with some nervous trading heading into the ECB meeting.

Investors will continue to focus on a disappointing inflation picture after German CPI disappointed and ECB member Nowotny suggested higher inflation is necessary to prevent a Japanese model deflation. Everything is pointing towards ECB action on Thursday but the scope and form is keeping investors guessing.

Lets not rule out some surprise good news though....

But in the meantime, the euro is hovering close to a three and a half-month low against the US dollar, around $1.36.

We'll also be watching events in Greece, where rumours swirl of a government reshuffle -- while in the UK, we have the latest Nationwide house prices which show prices rose by another 0.7% last month.

Oh, and overnight, the Indian and Australian central banks have both left their interest rates unchanged -- at 8% and 2.5% respectively.